The Point of Crowdfunded Real Estate Isn't To Make Everyone Rich

A young idea gets a little bit older – and gets some critics.

Fundrise, a D.C.-based real-estate crowdfunding startup I profiled last November, has since been getting a lot of attention for its proposal – which is either promising or mind-boggling depending on your perspective – to sell small shares of local real estate to people who live near it. Most recently, Matt Yglesias at Slatewrote about the concept last week (and confessed that he had put in some of his own money). This week Jonathan O'Connell at the Washington Postinterviewed wealth managers skeptical of the fine print.

Yglesias is doubtful that the idea will take off because a storefront in your neighborhood is an inherently risky, idiosyncratic investment when you'd probably be better off putting that same money in a mutual fund. But he also says this:

But if it does work, it’ll work in an excellent way. Not so much by providing a new kind of financial product that makes sense for middle class investors, but by altering the currently toxic politics of urban real estate development. A huge network of small-time, commercial real-estate shareholders could provide a much-needed counterweight to the plague of NIMBYs strangling America’s cities.

This is a key point. Crowdfunded real estate isn't an important idea because it may enable the lady next door to make it big like a real-estate developer. It's an important idea because it changes the trajectory of neighborhoods. The crowdfunding mechanism changes what gets built. O'Connell's query with wealth investors – who have no reason to be interested in this question – misses this point.

The wealth-manager's criticism – "this should be money they could otherwise just flush down the toilet" – also sidesteps the more apt comparison. People are already flushing money down the toilet on Kickstarter projects from which they never expect (or receive) any return. For many investors, crowdfunded real estate is more akin to a Kickstarter campaign that may improve your neighborhood than a mutual fund that may improve your net worth.

To be sure, some people will enter these deals hoping to make money. And some people will be severely disappointed when they lose the money they invest. As O'Connell points out, there are also some crucial details baked into the idea that Fundrise's creators were still wrestling with last fall, like how to handle liquidity for investors who decide down the road they want out of a property deal.

But in most other ways, it doesn't make sense to assess this idea as if it were just another tool for people to try to accumulate wealth. Investors, O'Connell writes, don't get any control over how a property is managed or leased in exchange for their investment. But imagine a shareholder meeting with 100 neighbors crowdsourcing the terms of a restaurant's lease. The idea quickly falls apart.

What it does mean, as an investor, is that you have to place your faith in both the project itself and the people who will be managing it. And if the model does become more widespread, there will certainly be bad actors who enter the fray and exploit unsuspecting investors (which is why some kind of regulation is needed). Yes, if you can't afford to lose whatever money you're thinking of betting on a nearby building, or an admired business, or your neighborhood commercial strip, don't try this.

If, however, you've got $200 you're willing to kick in to a communal bucket to ensure the vacant building down the street doesn't just become another bank branch, the advice of a wealth manager doesn't matter to you. And if that property does well with time – with the kind of patience that many big investors lack – then maybe the people who profit from it will actually live in the neighborhood.

When I spent time last fall talking with Ben and Dan Miller about this, I asked them what would prevent someone in Phoenix from investing in a project on H Street NE in Washington, D.C., or what would prevent me in Washington from investing in a coffee shop in Phoenix? If the underlying goal of this model is to restore the lost connection between the interests of investors and the interests of the communities where their money is spent, why couldn't savvy players simply spoil that model by cherry-picking crowdfunded projects from all over the country?

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"Well, what’s your favorite coffee shop to invest in in Phoenix?" Ben said. To which, of course, I had no reply. I've never even been to Phoenix.

And Dan again: "We just think it’s inherently less attractive to somebody in Phoenix to invest in a building here."

That's because the point isn't to find the sweetest property to park your money, anywhere you can. It's to leverage your money to influence where you live. If where you live ultimately makes you a bit of money, too, all the better.

About the Author

Emily Badger is a former staff writer at CityLab. Her work has previously appeared in Pacific Standard, GOOD, The Christian Science Monitor, and The New York Times. She lives in the Washington, D.C. area.